'Demonetisation exercise to 200 bps rate hike, cut 2% growth in 2016 Q4' | WeForNews | Latest News, Blogs ‘Demonetisation exercise to 200 bps rate hike, cut 2% growth in 2016 Q4’ – WeForNews | Latest News, Blogs
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‘Demonetisation exercise to 200 bps rate hike, cut 2% growth in 2016 Q4’

On November 8, 2016, the government of India unexpectedly declared 86 per cent of the existing currency in circulation as illegal tender.

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Demonetisation Que

Mumbai, Oct 9 : A new research report co-authored by IMF chief economist Gita Gopinath claims that the demonetisation exercise generated a decline in national economic activity of roughly 2 percentage points in the fourth quarter of 2016 and was equivalent to a 200 basis point interest rate hike.

The Reserve Bank of India has since February 2019 delivered a 135 basis point rate cut in order to revive economic activity which fell to over a six-year low at 5 per cent during the April-June quarter.

“The magnitude of the peak effect on output is comparable to a roughly 200 basis point tightening of the monetary policy rate based on the median of estimates reviewed in Ramey (2016) of econometric studies of US data,” the research report said.

The Modi government’s key argument to justify demonetisation was to reduce the use of cash which makes financial transaction an expensive affair but the research report concluded that in modern India cash continues to serve an essential role in facilitating economic activity.

Further the research report measured that the decline in cash lowered the growth rate of economic activity by at least 2 percentage points in the quarter of demonetisation and by 3 percentage points in November and December 2016.

“…a sharp, temporary decline in currency caused declines in ATM withdrawals, reduced economic activity, faster adoption of alternative payment technologies, and higher deposit and lower bank credit growth in Indian districts,” the paper said.

However, the report also notes that there may be longer term advantages from demonetisation that arise from improvements in tax collections and in a shift to savings in financial instruments and non-cash payment mechanisms.

The paper, ‘Cash and the Economy: Evidence from India’s Demonetisation’ including Gopinath was authored by Gabriel Chodorow-Reich, an associate professor of economics at Harvard, Prachi Mishra of Goldman Sachs and RBI’s Abhinav Narayanan.

On November 8, 2016, the government of India unexpectedly declared 86 per cent of the existing currency in circulation as illegal tender.

Business

ICICI Bank sets up presence in Nepal

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ICICI Bank

Mumbai, Dec 3: Lending major ICICI Bank on Thursday launched its operations in Nepal, via a representative office, to become the first Indian private sector bank to set up its presence in the country.

The bank opened a representative office in Kathmandu which will closely work with the domestic banks in Nepal to facilitate investment, trade, payments and treasury business between the two countries.

According to the bank, the current foray has expanded its global footprint to 15 countries including India.

“India and Nepal have significant trade and investment links between them. We believe that ICICI Bank’s on-ground presence through the new representative office coupled with its strong business partnerships with banks in Nepal, will help us further our participation in the economic flows between the two countries,” said Sriram H. Iyer, Head – International Banking Group, ICICI Bank.

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RBI asks HDFC Bank to temporarily stop issuing new credit cards

Furthermore, the filing said that these measures shall be considered for lifting upon satisfactory compliance with the major critical observations as identified by the RBI.

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HDFC Bank

The Reserve Bank has asked HDFC Bank to temporarily stop all launches of the ‘Digital Business generating activities and sourcing of new credit card customers.

The RBI’s order dated December 2 comes after outages in the bank’s online facilities or payment utilities occurred over the past 2 years, including the recent incident in the internet banking and payment system on November 21, 2020 due to a power failure in the primary data centre.

In a regulatory filing, HDFC Bank on Thursday said: “The RBI vide said ‘Order’ has advised the Bank to temporarily stop i) all launches of the Digital Business generating activities planned under its program – Digital 2.0 (to be launched) and other proposed business generating IT applications and (ii) sourcing of new credit card customers. In addition, the Order states that the Bank’s Board examines the lapses and fixes accountability.”

Furthermore, the filing said that these measures shall be considered for lifting upon satisfactory compliance with the major critical observations as identified by the RBI.

“The Bank over the last two years has taken several measures to fortify its IT systems and will continue to work swiftly to close out the balance and would continue to engage with the Regulator in this regard.

“The Bank has always endeavoured to provide seamless digital banking services to its customers. The Bank has been taking conscious, concrete steps to remedy the recent outages on its digital banking channels and assures its customers that it expects the current supervisory actions will have no impact on its existing credit cards, digital banking channels and existing operations.”

In addition, the bank said these measures will not materially impact its overall business.

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Petrol, diesel become dearer after OMCs raise retail prices

The pump price of petrol increased by 17 paisa per litre on Thursday to Rs 82.66 a litre in Delhi from a level of Rs 82.49 a litre a day earlier.

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Oil Price

Oil marketing companies on Thursday increased the prices of petrol and diesel after keeping the retail prices unchanged for the past couple of days.

The pump price of petrol increased by 17 paisa per litre on Thursday to Rs 82.66 a litre in Delhi from a level of Rs 82.49 a litre a day earlier.

Similarly, the diesel price increased by 19 a litre to Rs 72.84 a litre in the national capital as compared to Rs 72.66 per litre on the previous day.

The prices of auto fuel have also increased across the country but the level of rise has been different depending on the taxation structure in each state.

In the past 14 days, due prices have risen 11 days with petrol prices rising by Rs 1.60 per litre and diesel by Rs 2.38 a litre.

The increase has been primarily on account of firming up of global oil and product prices following news of successful coronavirus vaccine.

Petrol prices had been static since September 22, and diesel rates hadn’t changed since October 2.

Though retail pricing of petrol and diesel has been deregulated and oil marketing companies were following a daily price revision formula, the same was suspend ended for almost two months to prevent volatility in international oil markets from impacting fuel prices regularly during the pandemic.

But with crude on the boil again on news of a successful coronavirus vaccine launch soon, the patience was lost by OMCs who finally resorted to price increase to cover for their under recovery on the sale of two petroleum products.

The benchmark Brent crude has crossed $48 a barrel on Intercontinental Exchange (ICE) lately. It has remained an over $44 a barrel for most part of November.

OMCs need almost 40 paise per litre increase in retail price of petrol and diesel to cover for $ 1 increase in crude.

Going by this yardstick, product prices would have to be increased by upto Rs 2 per litre to cover under recovery on its sale.

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